We show how to use Hurwitz polynomials to study the stability and uniqueness of Rational Expectation equilibria (REE) in Dynamic General Equilibrium models (DGE). We apply this method to a model characterized by sticky wages and prices and by limited asset market participation (LAMP). We prove analytically in a fourth-order dynamics system that, once nominal wage stickiness is taken into account, LAMP does not invalidate the Taylor Principle.
Ascari, G., Colciago, A., Rossi, L. (2017). Determinacy analysis in high order dynamic systems: The case of nominal rigidities and limited asset market participation. ECONOMICS LETTERS, 159, 82-87 [10.1016/j.econlet.2017.05.040].
Determinacy analysis in high order dynamic systems: The case of nominal rigidities and limited asset market participation
Colciago, Andrea
;
2017
Abstract
We show how to use Hurwitz polynomials to study the stability and uniqueness of Rational Expectation equilibria (REE) in Dynamic General Equilibrium models (DGE). We apply this method to a model characterized by sticky wages and prices and by limited asset market participation (LAMP). We prove analytically in a fourth-order dynamics system that, once nominal wage stickiness is taken into account, LAMP does not invalidate the Taylor Principle.
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